Behavioral eco-lect2: Decision making under certainty part 3 (Value…
Behavioral eco-lect2: Decision making under certainty part 3
Standard economic prediction of a loss
So, the standard economic model predicts that gains and losses are the same
However, it turns out that often people value losses larger than a similar gain.
of going from 1 to 0 units:
U(1) – U(0)
plays an important role
of going from 0 to 1 units:
U(1) – U(0)
see graph slide 21/33
: A circumstance in which an individual values something which they already own more than something in case they do not yet own it.
Example of the endowment effect slide 23/33
Willingness to accept (WTA)
Willingness to Pay (WTP)
the gap between WTA and WTP => an endowment effect
One explanation: loss aversion (=being afraid of losses)
: To describe the endowment effect, economists use the ‘value function’
It is measured in changes:
the reference point (do you start from 0, or from 1, or from a loss?)
The side of losses is steeper than the side of gains.
graph slide 25/33
Application of the value function
The reference point is important. It allows to model that you are
‘disappointed’ or ‘surprised’
by something with the same end effect.
see example 26/33